Back to “Borrow and Spend”

The Monterey County Herald, July 8, 2001

By Leon E. Panetta

After 30 years of “borrow and spend” policies in Washington that resulted in $300 billion annual deficits and a national debt that soared to over $5 trillion, the nation—through a combination of tough fiscal discipline and unprecedented economic growth—achieved a balanced budget.

Earlier this year, the Congressional Budget Office projected a 10-year surplus of $5.6 trillion. The view from Washington was that there was more than enough money to pay for a $1.8 trillion tax cut, significant defense increases, a new prescription drug benefit plan, additional education funding and a host of other priorities, with plenty left over to pay down the debt and reform Social Security and Medicare.

For those of us who fought over the past 25 years to get the country out of the last deficit hole we were in, the current attitude in Washington was all too familiar and all too cavalier.

Our worst suspicions were confirmed within the last few weeks. The front page story in USA Today recently stated that a combination of the tax cut coupled with falling corporate tax revenue has “gobbled up three-quarters of the projected federal surplus through 2004.”

If this Congress, as expected, enacts more tax cuts and new spending programs, the result will require the federal government to borrow from the Medicare or Social Security trust funds in order to pay the bill. In less than one fiscal year, the nation will have gone from large surpluses back to “borrow and spend.”

How in the world could this happen?

Firstly, it was always dangerous to assume that a 10-year projection of the nation’s economic future represented “money in the bank” that could be spent now. The Congressional Budget Office made clear that about two-thirds of the projected surplus would not take place until after 2005. It is difficult enough to accurately project out two to three years, much less ten.

In this very unpredictable world, any crisis, economic downturn or oil price spike could dramatically reverse economic projections. To spend all of the surplus now is the equivalent of buying a Rolls Royce on the hope that future pay bonuses will occur over 10 years. In any family, that’s one hell of a gamble. The same is true for the nation.

Secondly, the economy has in fact weakened. When the Federal Reserve cut interest rates for the sixth time this year, the Fed’s top policy group stated, “The patterns evident in recent months—declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad—continue to weigh on the economy.” The Treasury Department recently revealed a 26 percent drop of quarterly corporate estimated income tax payments from the same period last year. According to a Wall Street Journal report, that will reduce the official 2001 budget surplus estimate by as much as $20 billion.

Thirdly, while the recent tax cut was estimated to cost $1.3 trillion, there are a number of artificial provisions and gimmicks in the law that terminate tax benefits in order to hold the overall cost of the bill down. For example, several middle income tax cuts are scheduled to end in 2004, 2005 and 2006. Indeed, all of the tax cuts including the estate tax repeal will end after 2010. No one believes this will happen. Congress is expected to reverse these provisions, extend these tax cuts and other popular tax credits at a cost of anywhere from $300 billion to $400 billion.

Since these extensions will consume a larger portion of the surplus, interest costs on the nation’s debt will increase because less of the surplus will be available to pay down the debt. That is estimated to cost close to $400 billion. Thus, the real cost of the tax bill—when all of the artificial sunsets and gimmicks are fixed—could run anywhere from $1.7 to $2.0 trillion.

Lastly, not only does the Congress not account for these tax fixes, it fails to include some obvious additional expenditures as well. The budget does not reflect any of the Bush administration’s additional defense modernization requests that are expected to total anywhere from $18 billion in 2002 to $200 billion over the next 10 years. Not even the cost of deploying a Missile Defense system advocated by the administration is included in the budget.

Although non-defense expenditures over the last 15 years have remained constant in real per capita terms, the budget now calls for $45 billion in reductions. But the administration and Congress have committed to significant increases in education, agriculture, veterans’ benefits and health research. There is no way the Congress can cut and spend more at the same time. In fact, the Congress is already approving appropriations bills that exceed the levels in the budget.

In addition, there is no money in the budget for hurricane, flood, earthquake or other disaster relief assistance that in the past has averaged $5.6 billion a year. And no funds are provided to fix the long-term solvency of Social Security and Medicare, programs that are expected to expand in costs with the retirement of the baby boomers.

The result is that in the absence of any leadership to control these runaway costs, the nation is headed back to the slippery slope that brought us deficit spending and quadrupled our national debt. Congress is virtually ignoring all of the lessons of the past.

When deficits were exploding during the 1980s, both parties were gridlocked over the most effective way to balance the budget. Republicans wanted more for defense and tax cuts and Democrats wanted to spend more on entitlements and domestic spending. The result was that the nation resorted to borrowing in order to satisfy both sides. It was only when the last two presidents and Congress agreed to compromise on taxes and spending that the cycle was reversed.

Today, the story is very much the same. Republicans want tax cuts and huge defense increases and Democrats want new entitlements like prescription drugs and more funds for education and health. But the surplus pot is limited, and neither is prepared to pay for these priorities. The result will be to borrow from Medicare or Social Security trust funds.

In the absence of any enforceable budget discipline, the nation is again headed toward certain fiscal crisis.

We govern our democracy through crisis or leadership. For the last four years, crisis and the threat of a government shutdown have controlled the budget process. If that is to change, the leadership of the nation must commit to the following: Protect under all circumstances the Medicare and Social Security trust funds to help reduce the debt and provide essential savings for future liabilities; establish realistic, enforceable caps on discretionary spending over the next five years; and require that any new tax cuts or spending proposals be paid for specifically by new revenues or spending cuts.

This is a crucial moment in our history. We can either learn from the lessons of the past, restore the credibility of the budget process and enforce budget discipline on federal spending or we can roll the dice on a “borrow and spend” mentality that will exhaust our surplus and further burden our children with debt in the future.

At stake is not only the credibility of the budget, but the very credibility of our democracy.